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There has been a lot of buzz lately about a new breed of Craigslist killers. OfferUp and letgo are the leaders in that pack and are into the business of facilitating local buying & selling. They have collectively raised more than $300 million in VC funding. The thesis is that with the emergence of mobile, there is finally a clear gap in Craigslist’s product strategy and that gap is good enough for these startups to exploit and build their own network effects.

While I agree with this thesis, I believe there are some market truths because of which these local buying & selling startups will never be big businesses. They surely will be relevant and will be used by millions of users but they will never make the kind of money that will guarantee their rapid growth once the VC money is gone.

In the matrix below, I have plotted local buying & selling startups in the broader e-commerce landscape. Ads and listing fees are the two prominent ways of monetization for companies in each of the quadrants.

Matrix showing the position of local buying & selling startups in the broader spectrum of e-commerce firms

My argument in that local buying & selling startups won’t be able to monetize enough if they were to stay in their current quadrant (1) and that it will be extremely hard for them to move into the other quadrants (2, 3 and 4) which are better suited for monetization.

Quadrant 1 is difficult to monetize

History and future of depressed prices

This year, OfferUp is likely to facilitate $14 billion in e-commerce transactions but it will make almost no revenue because it has not started to monetize yet. Craigslist facilitates a significantly higher $ value of transactions and earns only about $400 million in revenue. One reason for this low revenue is the nature of local buying & selling as a business. Given that most of the transactions happen offline, it is hard for Craigslist or anyone else to make money on transaction fees because of significant leakage. Another reason is that Craigslist doesn’t want to make more money than required to meet its costs and it has been open about that. Because of both these reasons, the market for local buying & selling has had artificially depressed prices with consumers assuming that listing should be free.

One might argue that if provided with a better product experience, customers will pay. That could have been true had it not been for the emergence of the unique phenomenon called Facebook. Facebook groups for local buying & selling have been pretty active and are free. The problem for the startups is that Facebook makes money from ads and ad platforms swear by one principle: ensuring a high level of engagement on the platform. By allowing consumers to buy & sell on Facebook, it is giving them another reason to come back to its increasingly utility oriented platform. It will never charge them for buying & selling because ads will allow it to monetize their presence much better. Sure, selling on Facebook might be a bit harder but it already has a highly liquid marketplace which works on mobile. So, it is good enough and sometimes that is all you need.

Limited value proposition for advertises

Local buying & selling startups in their current avatar are not attractive for advertisers. Users come to these platforms only for one narrow use case of buying & selling of used goods and given that this need doesn’t arise as often, the engagement levels on the platforms are low. This is a structural problem and is unlike any other major ad platform (Google, Facebook, Snapchat, Pinterest, LinkedIn, etc.). Successful ad platforms mean different things to different people and even different things to the same person at different times.

Moving into Quadrants 2, 3 and 4 is hard

Attractive local categories are now taken

Given the leakage we talked about earlier, the safest monetization bet for local buying & selling startups is to charge upfront listings fees i.e. fees for putting a listing on the platform irrespective of whether it sells or not. Only a certain type of seller putting a certain type of listing would see the ROI in paying that fee. Majority of Craigslist’s revenue comes from listing fees in three categories: employment listings, real estate listings and car listings. People get that and therefore, there are already startups that are targeted specifically towards these categories (example: Upwork, Zillow, Beepi, etc.). Like local buying & selling startups, these startups are designed to take advantage of the gap in Craigslist’s mobile strategy. They have already built a sizeable user base and offer a user experience that eases the friction in the specific category they are in.

Even if local buying & selling startups were to diversify into these categories, they would not be able to offer the desired user experience. The result would be an inventory with a selection bias. A quick look at cars on OfferUp vs. Beepi would tell you the difference. OfferUp has cheap old cars that few would want to buy whereas Beepi has real good cars. There is a direct correlation between the amount of effort one is willing to put in and the value of her item. Even if Beepi is more work, one would be willing to go through that if it means she can earn more for her valuable car. However, when one knows that her car is crappy, she would rather limit her agony, put it up on OfferUp in 10 seconds and make whatever she can. Sooner or later, buyers would realize this selection bias in the inventory of these startups, resulting in these startups capturing only a small part of these more monetizable categories.

Traditional e-commerce is a different ball game

eBay has been trying a transition from a P2P marketplace to a more traditional e-commerce business and it has been incredibly hard. Even if we assume that local buying & selling startups won’t make the same mistakes as eBay, some real problems will remain, making the transition extremely hard.

One, to scale up, these startups need to be acceptable to more buyers and that is possible only if they provide them with a significantly more structured in-app product experience and also with a significantly better service in terms of delivery and return. Both of these can be accomplished only if these startups get small and large businesses and not consumer sellers to become the dominant part of their seller base. As they make this transition, they will need to change their feedback policies and products (e.g. listing tools) to suit these larger sellers. How do you think that will make the consumer sellers feel? Marginalized and unimportant. All the promises of these platforms being a free land where users can list anything in 10 seconds and sell immediately would fall apart, leading to an outflux of these sellers.

Two, as these startups scale, their brand will turn from an asset into a liability. The effort that their marketing departments are putting to position these platforms as go-to destinations for local buying & selling will come back to bite them. Perceptions are hard to break and play a big role when buyers are deciding which platform to do what kind of shopping from. eBay has had this perception problem; people still refer to it as an auctions website for used goods when only 15% of its GMV now is from auctions and more than 80% of the goods sold on it are new.

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There could be some monetization tricks that these local buying & selling startups might have up their sleeve. However, as things stand right now, I am skeptical of how the future will pan out for these startups. Monetization winter for these startups might be around the corner.